China should monitor inflows, rapid yuan appreciation - former official

SHANGHAI, Sept 17 (Reuters) - China’s exchange rate regime does not need to be fundamentally changed, but the country should closely monitor large short-term capital inflows and the risk of a rapid yuan appreciation, a former central bank official told a wealth management forum.

Large short-term capital inflows could raise imported inflationary pressures and push up domestic asset prices, said Sheng Songcheng, former head of the statistics department at the People’s Bank of China (PBOC).

The yuan has risen more than 6% from lows against the dollar in late May as the economy recovered from the fallout of the coronavirus pandemic, while official data showed foreign holdings of Chinese bonds jumping 28% in the first eight months of 2020, as investors were lured by attractive yield premiums.

“Domestic yields are 200 basis points higher than other countries’ and at the same time, the yuan is in a process of appreciation,” Sheng said in comments posted on Wednesday on the China Wealth Management 50 Forum’s WeChat account.

“So we have to pay great attention to the impact of short-term capital flows on domestic financial markets. We cannot just let go,” he said, adding he expected capital inflow pressure to increase further.

But Sheng said there was no need for significant changes to the exchange rate regime, such as expanding the yuan’s daily trading band or abolishing the PBOC’s daily midpoint fixing.

Spot yuan touched a high of 6.7501 per dollar on Thursday morning, its firmest level against the greenback since April 30, 2019.

The rise has been driven by a rapid rebound in the world’s second largest economy and the PBOC’s increasing acceptance of a strong currency, alongside relatively tight monetary policy that has lifted Chinese yields.

Foreign investors in August raised their holdings of Chinese bonds for the 21st month in a row. (Reporting by Andrew Galbraith; Editing by Ana Nicolaci da Costa)